gold price report

arkadiusz-sieron

China Cuts Interest Rates, Will Fed Hike?

August 26, 2015, 8:39 AM Arkadiusz Sieroń , PhD

Yesterday, the People’s Bank of China cut interest rates to boost the economy. What does it mean for the financial markets and the gold market?

The China’s central bank lowered the one-year benchmark lending and deposit rates by 25 basis points to, respectively, 4.6 percent and 1.75 percent. The PBOC reduced also the reserve requirement rate by 0.5 percentage point to 18 percent, which could entail the strongest effects, as it would inject more than $100 billion into the economy. This move could restore confidence in the short term, however, we doubt whether it would change anything in the long-term perspective. Japan lost a whole decade after its real-estate and stock market bubbles burst, despite its loose monetary policy. China has definitely more room for maneuver, with still relatively high interest rates and the reserve requirement rate at 18 percent, however, monetary easing will not resolve the structural problems.

Anyway, the future of the global stock market seems to depend now on the annual Economic Policy Symposium in Jackson Hole, which will begin tomorrow. The meeting is important since it became the forum to signal potential policy actions, like the second quantitative easing program in 2010, operation Twist in 2011 or QE3 in 2012. If the Fed reiterates its eagerness to hike interest rates this year, we will probably see a consistent sell-off. After all, one of the longest uninterrupted bull runs in history was enabled by the Fed’s easy money (like quantitative easing programs) and share buybacks. On the other hand, delaying the rate hike may stem the tide, at the expense of the Fed’s credibility and the trust in the alleged strength of the U.S. economy. The second scenario would be better for the price of gold, however, the bear market in stocks may also increase the relative attractiveness of the shiny metal.

The take-home message is that China cut interest rates, which may ease the stock market panic for a while (this is why the price of gold declined after the cuts). Generally, the crash does not have to transform immediately into a bear market, as the first quakes in the credit markets during summer 2007 did not prevent a further build-up of speculation in equity markets. A lot depends on the next Fed’s moves. Perhaps, the U.S. central bank will signal its future actions as early as during the annual conference in Jackson Hole.

If you enjoyed the above analysis, we invite you to check out our other services. We focus on the fundamental analysis in our monthly Market Overview reports and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals.

Thank you.

Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor

Gold News Monitor
Gold Trading Alerts
Gold Market Overview

Did you enjoy the article? Share it with the others!

Gold Alerts

More

Dear Sunshine Profits,

gold and silver investors
menu subelement hover background